Operating cost

“ Several years are usually required before they obtain a sufficient amount of business or earnings to cover operating expenses, including depreciation and a reasonable rate of interest upon the investment. The amount by which the earnings fail to meet these requirements may thus be regarded as deficits from the operation. These deficits constitute the cost of building up the business of the plant. They are as much a part of the cost of building up the business as loss of interest during the construction of the plant is a part of the cost of its construction. ”

“ It is not possible to build any public service plant without incurring all these expenses to a greater or less degree. They are essential elements of cost, and must go into the value of the plant when completed. It can hardly be argued that cost, which in a large property runs into thousands or hundreds of thousands of dollars, has no value at the commencement of operation, nor does it appear that the value is subject to depreciation as long as the property is an operating plant. ”

“ Finally, there are the hosts of miscellaneous items of operating expenses in which we must be led to expect saving by all other experience in consolidating similar agencies performing similar services. Some of these expenses might even be eliminated entirely under Government ownership and control. Such are the cost of superintendence and auditing, insurance, the cost of securing traffic commissions, advertising and law expenses, to say nothing of the profits paid stockholders in normal years. ”

“ It serves to distribute equitably throughout the several years of service life the only expense of plant retirement which is capable of reasonable ascertainment-the known cost less the estimated salvage value. And it enables those interested, through applying that plan of distribution, to ascertain, as nearly as is possible, the actual financial results of the year's operation. Many methods of calculating the amount of the allowance are used. [17] The charges to operating expenses in the several years and in the aggregate vary according to the method adopted. ”

“ If you will take into account these various factors constantly operating toward a reduction of operating and general expense cost, and interest cost, the conclusion must necessarily be forced upon you that the price at which current can be sold at a profit to-day is in no sense a measure of the income per unit which it will be necessary for central station managers to obtain in the future. ”

“ While these great organizations, made up by placing under one general management a number of great establishments manufacturing articles of like character, are doubtless able to reduce the cost of production and distribution and prevent production in excess of probable demand, it is also true that they are in many cases able to exercise a greater control over prices of labor, of material and of finished product than when operating singly. ”

“ While a part often has some service value, although not efficient according to the existing standard, its use may involve such heavy, unnecessary operating expense as to render it valueless for rate making purposes under section 15a. The Commission, when requested to consider evidence of reproduction cost, must therefore examine the value of every part of the plant, and that of the whole plant, as compared with the value of a modern, efficient plant. ”

“ See infra, pp. 304-305.↑ The phrase 'jurisdictional cost of service' as used here means the producer's system-wide cost of service (i.e., all operating expenses, including depreciation, depletion, and taxes, plus a fair return on the rate base) for its sales of natural gas subject to the Commission's jurisdiction. ”

“ Primary cost is but 134the first step. The work of building up, by securing the amount of additions and betterments that have been made from year to year, is one of appalling magnitude and of utter uncertainty and conjecture. Keeping in mind that, prior to July 1st, 1907, the railroad companies of the country did not have a system of uniform accounting, and that additions to property were charged to operating expenses to the extent of hundreds of millions of dollars ”

“ The establishment of standard or efficiency labor costs means predetermined costs. This is a radical departure from established custom; on its face, contrary to recognized accounting practice; in results, wonderfully efficient. To determine standards in men, material, and machines is a function of the engineer; the recording of facts—the actual cost—is the function of the comptroller or accountant. ”

“ Particularly in those businesses in which interest and depreciation charges in plant constitute a large element in the cost of production, experience has taught that the financial burdens incident to unnecessary duplication of facilities are likely to bring high rates and poor service. ”

“ Other experts, who reject the factor of interest unearned during the period of development, build their estimates of going value upon the cost of attaching new customers to the business, a cost not taken from the books, but merely presumed or estimated at widely variant amounts. ”

“ The cost of production includes the cost of material, labor, and expense. It is necessary, therefore, to keep an accurate record of material and supplies issued to the factory, just as is done in factories manufacturing goods on special orders. Labor costs should be recorded by departments, and the distribution of expense should be by departments, as far as possible. ”

“ The cost of administration, which includes the time and money expended by the parties who are engaged in the enterprise, purchasing the material, procuring the money for their payment as needed, and generally superintending the entire enterprise during the construction of the plant. ”

“ It is furthermore contended that the cost of carrying the inventories for which the purchasing, stores, and planning departments of a manufacturing concern are responsible, should be shown with interest on the money invested in them taken into consideration—this for the purpose of providing a check on the efficiency of these departments. Where also both old and new machinery is used side by side and it is desirable to compare their costs of production, the element of interest should be considered. ”

“ Every machine should be charged with its full cost. Full cost is understood to include invoice price, insurance during transit, freight, duty, and drayage charges, and installation costs. The last item usually includes the platform or stand on which the machine is erected, with all costs in connection therewith, when special supports or platforms in addition to the regular factory floor are needed. ”

“ A great majority of those who advocate valuation say that they should be based on the cost of the service. The proper method, then, would be to ascertain the exact cost of hauling each commodity and then base rates on these ascertained costs, making them just high enough to allow the road a fair return. ”

“ Benefits and costs should be measured and appropriately discounted over the full life cycle of each project. Such analysis will enable informed tradeoffs among capital outlays, operating and maintenance costs, and nonmonetary costs borne by the public. ”

“ These are the indirect costs of manufacture because, while just as necessary as the prime cost elements, it is impossible to allocate them directly to the product. How much of the cost of light, how much of repairs cost, how much of the cost of factory supplies, etc., shall be charged to each unit of several different kinds of product constitute a problem on the solution of which depends the whole structure of accurate costing. Accurate distribution of materials and labor costs may be complex, but presents no real difficulties. It requires little more than careful and painstaking work. ”

“ If cost accounting by departments is determined upon, it becomes necessary to carry the departmental analysis beyond the gross profit stage, in which case building expense must be taken account of and spread equitably over the various departments. Likewise, within the factory it may be desirable to allocate the item of building expense over the various departments of storeskeeping, costing, and production proper, and even a further analysis may be necessary depending somewhat on the detailed information desired. ”

“ Practically no cash investment whatsoever was ever made in establishing or organizing an express company, nor in equipment to conduct its business. Every dollar of value there is in equipment and other tangible assets of the express companies today—and hundreds of millions besides—has come from the people—has been taken from the people for handling their express business at rates ranging from two to five times the actual cost of handling. ”

“ Having found the average amount of the required revenue that each class must pay, and the average amount of the total output each class will use, dividing the former by the latter for each case will give the rate each class is to pay during the new period.
It is often found in plants that large extensions have been made to supply a special contract for a long period of time, and these extensions are set aside for the exclusive use of this contract. In such cases exclude the cost, etc., of this part of the plant from the "Fair and Equitable Value" in the matter of adjustment of rates. ”

“ In a small plant, where the selling division is conducted through the general office at an expense so small as not to affect the cost of administration over what would be necessary for manufacturing purposes only, or where there is difficulty in separating the selling from the manufacturing expense, the two are often combined as general expense and pro-rated as one account into production costs. ”

“ Many engineers maintain that repairs are light during the early life of an asset and heavy during the later years. If this is true and these costs are charged to the period in which they are incurred, the combined depreciation and up-keep costs place an unjustly heavy burden on the output of the later years. Almost equally good authority maintains that the cost of repairs is in no sense uniformly graduated as implied above but can be counted upon in practice to be extremely irregular. ”

“ No basis for valuation can be found which will prove entirely satisfactory under all circumstances.
In the light of the conditions involved, particularly as to whether there is a constant market for the utilization of all the scrap material in the manufacture of the side line, each concern must adopt whatever policy best suits its peculiar needs. At all times the application of materials costs to the product should provide an intelligent basis for entering into future contracts. A blind use of cost figures frequently invites disaster. ”

“ While, also, the rates for the low-value articles may not cover every item in the so-called cost of service, they do contribute to the revenue an amount which might otherwise have to be made good by the fixing of higher rates on goods in other classes. ”

“ Most manufacturing and contracting concerns have at all times a more or less constant volume of work in various stages of completion. At the close of the fiscal period when results are summarized, the proper treatment of this uncompleted work is an important matter. The general principles governing the valuation of this work were discussed in Chapter XIII where it was pointed out that in the main conservative business policy demands that work in progress be included in the inventory at full cost, which is to include both prime cost and an equitable share of burden accrued to date. ”

“ Probably correct present value estimates which include depreciation may not be even fairly approximated without intimate knowledge of the particular property, and this should embody operation, policy of management, past performance, study of historical cost (as far as the records will permit) , estimated cost of construction, and actual cost of maintenance. The life of a piece of track or equipment, disregarding obsolescence and extraordinaries, generally depends on the type and details of construction, the service it has done, and the service that will be required of it. ”

“ Manufacturers recognize the necessity for comprehensive statistics in the manufacturing branch; they realize that they must know what their goods cost to manufacture; but in comparatively few enterprises is the importance of commercial costs recognized.
In the factory, costs are figured down to the most minute detail; what it costs to perform each operation on every part of the completed whole is known; the efficiency of every man—what he costs in wages, in power, and general expense, and the cost of every bit of material he uses—all of this is told by the cost accounting system. ”

“ The manufacturing cost formula comprises the three items of: (1) raw material consumed, (2) direct labor applied, and (3) factory expenses incurred, this latter item sometimes called overhead expenses. When a concern operates a detailed cost system, the valuation of the finished product is not difficult, being the goal towards which the system works. Where no cost system is used, great care must be exercised to make sure that every item of cost is calculated as accurately as possible and that a proportionate share of such costs is applied to the finished product still on hand unsold. ”

“ The service output method bases the depreciation cost not on years of [Pg 178] life nor on life in terms of working hours of service. Here an attempt is made to predetermine the output of the asset in terms of units of product, and so burden every unit with its fair share of depreciation. To secure full equality of charges, up-keep costs must be reckoned on the same basis, rather than on a time basis of service hours or length of life. If conditions are uniform and normal, this method, where applicable, secures perhaps the most satisfactory of all allocations of depreciation costs. ”